By MICHAEL J. DE LA MERCED and CLIFFORD KRAUSS, New York Times, October 16, 2011
Kinder Morgan agreed on Sunday to buy the El Paso Corporation for about $21.1 billion in cash and stock, striking one of the biggest energy deals in history, to tap into a boom in natural gas drilling and production.
Through the deal, Kinder Morgan will become the biggest of North America’s midstream energy companies, which are entities that process oil and gas products before transporting them to production facilities. Kinder Morgan will own or operate about 67,000 miles of pipelines stretching across the continent.
“If you believe in the future of natural gas, you believe in putting together the biggest possible network,” Richard D. Kinder, Kinder Morgan’s chief executive, said in an interview. He added that the deal was “a once-in-a-lifetime opportunity.”
Drilling and producing oil and gas from shale and other tight rocks has taken off in the last five years, as Exxon Mobil and other major energy companies have purchased smaller players with sizable stakes in the big shale fields. But many of the country’s shale fields, including the Bakken in North Dakota, the Eagle Ford in south Texas and the Marcellus in Pennsylvania, lack the pipeline capacity to carry all the oil and gas being produced there. The surge in output has produced such a glut that the price of natural gas has plummeted, and excess gas is being burned off instead of being captured.
Other energy pipeline companies have sought to combine as well. This summer, Energy Transfer Equity and the Williams Companies jousted over another pipeline operator, the Southern Union Company. Energy Transfer appears to have won the bidding with a $5.9 billion offer that Southern Union accepted in July.
The combined company, which will keep the Kinder Morgan name, is expected to move more than 1.9 million barrels of fuels a day. It will also operate the only oil sands pipeline that services the West Coast.
“This makes Kinder Morgan the dominant pipeline company in the country,” Chip Johnson, the chief executive of Carrizo Oil and Gas, a midsize driller in the shale fields, said. “They are everywhere now. They can deliver gas all over the country.”
Including the assumption of debt owed by El Paso and an affiliated business, El Paso Pipeline Partners, the takeover is valued at about $38 billion. That makes it the second-biggest deal announced this year and the largest energy deal since Exxon Mobil bought XTO Energy for $40.8 billion in late 2009, according to Standard & Poor’s Capital IQ.
Kinder Morgan is paying a big premium for El Paso. For each share of El Paso, Kinder will pay $14.65 in cash, 0.4187 of a Kinder share and 0.640 of a warrant. At Friday’s closing price, that values the offer at about $26.87. That is a 37 percent premium to El Paso’s Friday closing price and a 47 percent premium to El Paso’s 20-day average closing price.
Despite the high price, Kinder Morgan argues that the transaction will provide big rewards for shareholders. The company said that it expected to begin raising its dividend next year at an average annual rate of about 12.5 percent through 2015.
Kinder Morgan, which has received financing from Barclays Capital to pay for the cash portion of the deal, plans to sell El Paso’s exploration and production business to help pay down that debt. El Paso had already announced in May it would spin off those businesses, which account for about 34 percent of its annual revenue, to its shareholders.
The deal’s is expected to close by the second quarter next year. Kinder Morgan shareholders will own about 68 percent of the combined company, while El Paso shareholders will own the rest.
The El Paso purchase is the latest deal by Mr. Kinder, a former president of Enron who founded Kinder Morgan in 1997. Since then, he has spearheaded several deals that have transformed the firm into one of the nation’s biggest pipeline operators. In 2006, he took the company private in a $22 billion deal, backed by a consortium that included Goldman Sachs’s private equity arm and the Carlyle Group.
Kinder Morgan re-emerged as a publicly traded entity in February in one of the largest initial public offerings by a company owned by private equity firms, raising nearly $2.9 billion.
The genesis of the deal lay in that I.P.O. While Kinder Morgan had held talks with El Paso’s management about a possible merger for years, it needed the currency of a public stock to complete such a deal, Mr. Kinder said.
He approached El Paso’s chief executive, Douglas L. Foshee, in August about a potential deal, three months after El Paso announced its break-up plans.
“I had to go on bended knee to Doug,” Mr. Kinder said.
He added that it was unlikely that Kinder Morgan would pursue a deal of this size again, though the company planned to take advantage of other opportunities to grow.
The transaction is subject to approval by both Kinder Morgan and El Paso shareholders. Mr. Kinder owns more than 30 percent of his company, while El Paso’s largest shareholders include the activist investor Carl C. Icahn, who owns a 6 percent stake, and Jana Partners, which holds about a 3.2 percent stake.
While Mr. Kinder said he did not expect the deal to be blocked by antitrust regulators, he added that both companies would work with the Federal Trade Commission to pare excessive overlap in their pipeline networks.
El Paso has agreed not to seek any higher rival offers, and would be obligated to pay Kinder Morgan a $650 million break-up fee under certain circumstances. Kinder will add two new seats to its board, to be filled by two El Paso directors.
Kinder Morgan was advised by Evercore Partners, Barclays and the Weil Gotshal & Manges and Bracewell Giuliani firms. El Paso was advised by Morgan Stanley for this deal, and had already been receiving advice from Goldman Sachs on its previous spinoff plan. It received legal counsel from Wachtell, Lipton, Rosen & Katz.